Question

2. In order to circumvent the non-convertibility of currency, an MNC can

1. Use barter rather than currency
2. Trade currency on the black market
3. Both a and b
4. None of the above

3. Which of the following types of transactions allows traders to hedge against the risk of future exchange rate changes?

1. Spot transactions
2. Barter
3. Countertrade
4. Futures

4. Which of the following does NOT affect the ad valorem tax placed on imported goods?

1. The value of the goods
2. The country of origin of the goods
3. The culture of the importing country
4. The classification of the goods

Answer 1

2. Answer : (c) Both A & B

A non convertible currency is a type of blocked currency such that it is not traded on international financial exchange markets. The restrictions are imposed by the parent country who are concerned with their economic stability. The only way to trade a non convertible currency is through black market. But since it's considered illegal, companies could use barter system where goods and services are exchanged for goods and services. Some companies use a financial instrument called Non Deliverable Forward Contract for trading with countries having Non Convertible Currencies.

3. Answer : (d) Futures

To reduce the risk of future exchange rate risks, traders c use Futures contract in the derivative segment for hedging. As the futures transaction enables the trader to pay only a small upfront margin amount, it can be beneficial to them to avoid risk. Since a contract is signed upon the current price levels, the traders can benefit if the market rates go up but the traders have an obligation to enforce the contract at the futures maturing date.

4. (c) Culture of the importing country

Ad valorem tax is charged by government entities on the assessed value of a property, product or a service. It includes property taxes, sales tax, Value added tax, etc.

In case of imported goods, the value added tax levied on the goods are affected by the value of goods and the country of origin of goods as import tax rates can be different for each country. The tax rate also depend upon the classification of goods and services. The value added tax is generally imposed on the total value that good or service adds to the market. Here, exception is the culture of the importing country.